Equity financing constraints and corporate capital structure: a model

Abstract

Purpose

The “supply-side effect” brought about by the imperfection of the capital market has increasingly been concerned. The purpose of this paper is to study how will the uncertainty of equity financing brought about by the equity financing regulations in emerging capital market affect company's capital structure decisions.

Design/methodology/approach

This paper establishes a theoretical model and tries to introduce equity financing uncertainty into the company's capital structure decision-making. The paper uses mathematical derivation method to get some basic conclusions. Next, in order to characterize the quantitative impact of specific factor on capital structure, numerical solution methods are used.

Findings

The model shows that firm's value would decrease with the uncertainty of equity financing, because of the relationship between firm's future cash and their financing policies. The numerical solution of the model suggests that the uncertainty of equity financing is one of the important factors affecting the choice of optimal capital structure, the greater the uncertainty is, the lower optimal capital structure is.

Originality/value

The research of this paper has certain academic value for further understanding of the issues.

Citation

Wang, Z. and Zhu, W. (2013), "Equity financing constraints and corporate capital structure: a model", China Finance Review International, Vol. 3 No. 4, pp. 322-339. https://doi.org/10.1108/CFRI-12-2012-0110